While it can be argued that money has no “intrinsic” value since the US abandoned the gold standard system in 1971, the dollar is supported by the government’s “complete faith”. However, due to the wrong reaction to the pandemic, mistrust of big government, income inequality and trade wars, there is a lack of faith in this government. History shows that it always ends badly.
US fiscal extravagance does not last forever. Today, the once mighty hegemony of the dollar is losing ground as the share of dollar reserves held by central banks fell to 59.5%, their lowest level in 25 years. The decline is partly due to the declining international role played by the United States, which accounts for only a quarter of the world’s gross domestic product. Because they are concerned about US financial hegemony, Russia and China are actively de-dollarizing, diversifying away from the dollar and buying gold. China has slashed its US reserves from $ 1.2 trillion to $ 1.05 trillion, far from the $ 4 trillion peak. Russia has completed the construction of the Nord Stream gas pipeline to Europe and will start taking rubles instead of dollars. And that is not all.
Europe introduced the European Payments Initiative (EPI) to bypass the US payment oligopoly as a matter of sovereignty. The Biden administration will face a broader challenge as it seeks to move from fossil fuels to renewable energies to achieve carbon neutrality. With Americans dependent on fossil fuels like oil, natural gas and coal for nearly 80% of their energy production in a green new world, what happens to the dollar, exports and imports?
All of this means that investors no longer have confidence that they can place most of their holdings in dollars, especially if those dollars are inflated or subject to sanctions or climate change. Their capital is also undermined by quantitative easing rounds that have flooded the market with newly issued Treasury bonds. As a result, the balance sheets of international investors have become overwhelmed with dollars, which are at risk because America’s double deficit leaves it with soaring debt, inflationary concerns, and a test of confidence.
From 1946 to 1971, the US dollar was backed by gold at a fixed rate of $ 35 per ounce. Then, in 1971, the Nixon administration broke the gold bond, devaluing the dollar because European countries demanded that their dollars be paid in gold, and foreign claims against the dollar would bankrupt the country. While the dollar, not gold, is backed by the “complete faith and confidence” of the United States, the dollar is a fiat currency. Today, trillions of dollars are owned by others because the US has become the world’s largest debtor. Citizens have little confidence in their government, and unprecedented incentives have sparked inflation. The tarnished dollar has been undermined by America’s ineffective economic and financial management. Without reference to gold, it is overvalued.
In practice, this system allowed the United States to consume more than it produced and to fund its day-to-day deficit with new dollars. The question is, can the world absorb these dollars? The UK was once the richest country on earth, and the British pound sterling was the reserve currency for international settlements. However, due to the Second World War, the pound was deeply mired in debt, so it was replaced by the dollar. However, history shows that florins and ducats existed before the dollar-based world order, followed by the Dutch guilder. The dollar does not last forever. No country can afford the deficits and public debt that the United States currently has.
Deficit monetization is inflationary. The rise in inflation took the Fed by surprise. So another burst of inflation is likely and a return to the level of the seventies. Stimulus amid Covid-19 has raised debt to record levels. Unsurprisingly, money has depreciated. There are too many of them and it will cost you a lot to keep cash. The money is free. Sovereign debt today brings nothing or less than nothing because of the privilege of lending money to the government. Why should investors continue to lend money to the government if a significant portion of that debt has yields below zero?
First of all, we are facing a financial crisis, and despite the imminent collapse in 2008, the financial system, as “ready for anything” as the health care system, remains extremely vulnerable. Corporate debt is $ 11 trillion, roughly half the size of the US economy. As a result of the restrictions, budget deficits and debt will rise, and the currencies of those debtor countries that finance their deficits by printing money will fall. The USA is exceptional here. Inflation is skyrocketing. Their democratic institutions are under siege.
The Fed cannot afford higher interest rates given that the huge US debt burden exceeds 115% of GDP. The financial system is vulnerable to a major explosion as the US digs into an even deeper hole. Gold is an alternative to the dollar and a solution for those who have too many of them. The US has a serious problem with debt, deficits and the dollar. The decision, if any, will be painful. Gold is an asset that is both real, like real estate, and liquid, like currency. This is exactly what an investor needs today.
The price of gold neutralized the last year’s losses and within two months rose to $ 1.900 dollars per ounce. The stock market sold 500 points. John Ying believes that the pullback in gold has created a new low, and the next target for gold is $ 2,200 an ounce. Gold demand remains high with limited supply.
Nothing has changed in principle. Gold cannot be created with a single click, but only through very costly mining processes, and this is only in small quantities. Central banks continue to increase their foreign exchange reserves, especially China, Serbia, Kazakhstan and Thailand. The new Basel III rules will restrict central bank participation in risky gold derivatives markets by setting price floors. For central banks, gold is an alternative to the dollar.